環匯 (GPN) 2003 Q3 法說會逐字稿

Welcome to the Global Payments third quarter earnings release conference call. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. If you should require assistance during this call, please press 0, then star. As a reminder, this conference is being recorded. I would like to turn the conference over to your host, Mr. Paul Garcia, Chairman and CEO of Global Payments. Please go ahead sir.

Good morning. Welcome to the Global Payments conference call for the third quarter of 2003. Joining me are Jim Kelly, CFO and Jane Forbes, Investor Relations. I want to remind you that some of the comments on this call may contain certain forward looking statements pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. While these statements reflect our best current judgment, they are subject to risks and uncertainties that could cause actual results to vary. These risks and uncertainties are discussed in detail in our 10-K. Now, for the agenda.

The agenda for our call today is as follows. I will give an overview of our third quarter results, review the trends we observed during the quarter and discuss recent events. Jim will discuss the financial results in detail and review the integration status of the National Bank of Canada merchant portfolio acquisition. I will talk about our updated 2003 outlook. Lastly, we will have a question and answer period. Now, for our Q3 results.

We reported strong financial results for the third quarter ended February 28. Our revenue grew 8% to $124.6m resulting in net income of $12.1m for an 18% increase over prior year. Diluted earnings per share grew by 19% to 32 cents. These results reflect mid-teen growth in the direct merchant channel offset by declines in indirect funds and transfer channels. Now for the Q3 trends.

Our domestic direct transactions in the quarter grew in the mid-teens. This transaction growth compares favorably to market trends, which demonstrates that we continue to gain market share in both our domestic direct and ISO sales channels. In addition, our domestic average ticket and spread have remained stable for the quarter, which we believe is a result of our diversified mid-market segmentation. Our Canadian transactions are continuing to grow, thus far this year, in the high single digits. In addition, our average ticket and spread have held relatively constant as we continue to further penetrate the Canadian market and successfully cross sell between the Visa and MasterCard portfolios. Since our cross sell initiatives began, we have commitments and signings for approximately $2.3b in new annual processed volume. This is a significant increase over the $1.6b in commitments we noted in our first quarter call. Moving on to recent events.

I am pleased to announce we recently held a senior executives payments conference attended by the CEO’S from the largest ISO customers. We believe this conference reinforced our ongoing commitment to provide the highest level of service and support to these important customers. During this conference, we launched Global link advantage, a secure web portal for unprecedented access for our ISO’s to a host of data concerning their merchant customer, thus allowing them to more effectively manage their business in a real time environment. Our U.S. direct sales force also continues to be productive by successfully signing thousands of mid-market merchants this quarter. A few of them more notable signings were the Commonwealth of Pennsylvania, Choice Point and Vital Check Networks, providers of identification and credential verification services, Fisher Scientific, a medical equipment provider, South Motors Automotive Group, a major dealership in the southeast, and Boulevard Restaurant Group, a high-end restaurant group in the San Francisco Bay area.

Our Canadian sales force continues to aggressively cross sell mass they are card and Visa services, and we have signed thousands of mid market Canadian merchants this quarter. In addition, we continue to sign larger Canadian merchants, a few of which are Dominion Gas, Queens University, and Sunny Brook woman's college, Canada Budget rent a car, Premium Brands, a wholesale food distributor, and as part of our cross sell initiatives, we signed over Weighty Foods and Canada Safeway. We continue to add new check merchants for both our guarantee and gaming products. The following merchants represent a cross section of the recent signing. Reebok retail U.S., Speedway Super America with 725 service stations, and for the gaming product, we signed Las Vegas' newest property, the Tuscany Hotel and casino. Lastly, we are please to announce our participation in the Visa POS check program. This program not only converts a check at point of sale into electronically settled transaction but, importantly, routes the check transaction directly to the check writers DDA at participating financial institutions for positive verification of funds availability. Here to fore, check verification programs, including our own, relied primarily on negative file information. Visa's program, coupled with our guaranteed product, not only offers our merchants a better product set, but positions us to provide our Visa endorsed guarantee programs to other participating payment processors and financial institutions. In summary, we had a very successful quarter. I will ask Jim for review the financial results in detail. Jim.

Thank you, Paul. I will cover the following. A review of the third quarter and year-to-date income statement, comments on the cash flow statement and balance sheet and an update on the integration of the National Bank of Canada portfolio acquisition. For the quarter, revenue grew 8%, to $124.6m, joined by mid-teen growth in our direct sales channel. This growth was partially offset by mid-double digit declines and our indirect and funds transfer channels. Our funds transfer channel generated $2.8m in revenue during the quarter. Also for the quarter, operating expenses were $102.8m , resulting in an operating margin of 17.5% as compared favorably to 15.6% in the prior year quarter. The third quarter operating margin increase was primarily due to the integration of our recent acquisitions and the implementation of cost reduction initiatives. These cost reductions were partially offset by the ongoing investments made in our direct and ISO sales channels as well as the increase in commission payments to our ISO’s. Finally, in the third quarter, net income grew 18% to $12.1m and diluted earnings per share grew 19% to 32 cents, up from 27-cents in the prior year quarter.

Our effective tax rate remains at 37.4% as compared to the prior year rate of 38.2% as a result of the impact of acquisition and tax planning initiative. On a year-to-date basis, our revenue grew 12%, and our organic revenue grew 8%. Organic revenue is defined as GAAP revenue excluding the current year impact of acquisition that have not yet annualized. Net income grew 16% to $40.3m, and our diluted earnings per share grew 16%, to $1.07, excluding the prior year trademark impairment charge as described in our latest Form 10-K. Now, turning to the cash flow and balance sheet.

We reported $64.9m in free cash flow for the nine months ended February 28th as compared to $42.8m in free cash flow for last year, or a 52% increase. Free cash flow is defined as net cash from operating and investing activities, excluding business development and changes in working capital. A strong free cash flow growth is due to the increases in our direct card business and National Bank of Canada portfolio acquisitions and a reduction in capital expenditures to the timing of capital projects. A $30.9m processing use of cash during fiscal '03 is primarily due to the anticipated change in the funding for our Canadian Visa merchants. As we noted on the last call, the Canadian facility was amended to provide our merchants in Canada same-day value, which is the market practice. Prior to this amendment, CIBC provided the funding directly to support the same-day value practice. Now global funds this practice and incurs the related interest expense. Capital spending was $2.9m, primarily for software and infrastructure developments. We now anticipate capital spending in the range of $15m to $20m for fiscal '03. Turning to the balance sheet.

The increase in accounts payable and other accrued liabilities was primarily due to the timing of income tax payables. We had no borrowings under our U.S. credit facility at the end of the quarter. Finally, with respect to our cash flow strategy, it remains unchanged and is three-fold. First, to pay off debt arising from the timing of working capital needs. Second, to pursue accretive acquisitions and finally to make capital investment in our business. Now, turning to our acquisition integration update. We are pleased to announce that we are completed our National Bank of Canada front-end conversion. National bank of Canada’s front-end was successfully converted to our Canadian base third party processor taking us down to a single front-end platform for our Canadian direct merchants. This conversion was seamless and transparent to our Canadian merchants. Today, all our Canadian acquisitions have now been successfully converted to our processing platform. Now, Paul will give an update to our fiscal '03 guidance. Paul.

Thanks, Jim. I will now discuss our updated fiscal 2003 guidance. Based on our results and our current outlook, we are reaffirming full-year revenue guidance of between $495m to $514m. However, we are raising diluted EPS guidance from $1.35 to $1.41 to new guidance of $1.39 to $1.42. This reflects 13% to 15% growth over our $1.23 normalized diluted EPS for fiscal 2002. Although we consider the lower ranges of this guidance to be very conservative, it does not reflect the potential impact of any cataclysmic event in the United States or in Canada as a result of the war with Iraq or terrorist activities. We're now delighted to go to questions. Operator.

Ladies and gentlemen, if you wish to ask a question, please press the 1 on your touchtone phone. You will hear a tone indicating your line has been placed in queue, and you may remove yourself from queue at any time by pressing the pound key. If you did press 1 prior to the announcement, we ask you do so again at this time. If you wish to ask a question, press 1 on your touchtone tone. Our first question comes from the line of John Mathis with Goldman Sachs. Please go ahead

Good morning, Paul and Jim. Can you talk to us a little bit about what changed in the cost structure or the internal leverage you're getting from the integration efforts that led you to increased guidance? Thanks.

John, firstly, let me speak to the margin pickup in the quarter. That gave us encouragement for guidance increase for EPS for '04. Then I will ask Jim to follow on. Firstly, the -- as you mentioned, the impact of integration activities have certainly helped things. We have other cost-cutting initiatives, which have kicked in and that's an ongoing effort. That also has produced these favor favorable results. We have automations in systemic solution that are starting to bear fruit as well. All of that, in sum, encouraged us to increase guidance. It is also responsible for this increase in margin. Jim.

the only other item I would add, John, we are still in the third quarter coming off the September 11th impact. December was lower last year than it was this year. As a result, because of the fixed cost, variable cost nature of the business, I think we saw a better overall quarter than we had last year

Okay. In terms of new sales, it sounds like the ISO strategy is going well. Can you update us on the profile of that channel? Are there any vertical markets you are seeing, a pickup in market share?

Yeah, ISO’s continue, John, to be very strong for us. I referred to the ISO conference, which further reinforced our commitment and desire to grow that channel. We are pleased with the results. In terms of vertical markets, a government, you heard us talk about the state of Pennsylvania. That's a case in point. Our government vertical has grown very nicely. In addition, we have some verticals that kind of fall into recurring payments, but things like charitable payments, utilities, other recurring-type payments are also up very nicely.

Thank you very much.

Thanks, John.

Our next question comes from the line of Dris Upitis from Credit Suisse First Boston, please go ahead.

Hi. It is Dris. Congratulations on a nice quarter guys.

It is Dris Upitis, by the way

Thank you. Just another question on ISO’s. If you can give us a sense from the contribution you have seen from that. Or maybe another way to think about it is you mention high single revenue growth in Canada. Is it right to think the difference between Canada and the U.S. is driven by the absence of the ISOs in that market?

Let me take it in order. The ISOs, Dris, are something greater then 10%. They have broken through that barrier. They are low teens right now in the U.S. They are becoming a more significant source for us, but our organic direct revenue non-ISO growth is greater in the United States than it is in Canada. I think that's a function of the market, quite frankly. The Canadian growth, we are ahead of where the market is growing in total, but it does lag the U.S. Now, of course, when you include the ISO in that number, it absolutely, in total terms, lags the U.S. as well

Okay. And then as far as the indirect revenues go, can you just give a sense for what the cause of that slowdown was, the decline there that offset some of the strength in the direct channel?

Yeah. There's a couple things, Dris. Firstly, here to fore, we have, through that channel, sold a lot of equipment. While that does kind of beef up the top line, it's pretty empty calories. You're selling a $300 device in bulk. Not individual sales. You would sell thousands of those to a bank or another service provider for, you know, a couple bucks a device. So it's very empty calories. We, quite frankly, abandoned that. So you're getting some comparables from quarter to quarter and previous quarter last year we had a bunch of that. This year we have very little. We're a little bit -- in fact, I would say that's the majority of the increase in the downtick in the indirect business for this quarter was primarily that.

Okay. Great. That's helpful. Thanks a lot

Thank you, Dris.

Our next question comes from the line of Tony Wible from Salomon Smith Barney. Please go ahead

Congratulations on a great quarter. I had a couple of questions. The first one, could you run over some of the metrics that you might have been seeing as far as pricing and spreads on the average ticket sizes. You mention you hadn't seen much of a change. I was hoping you could provide more color by countries, domestic versus Canada and also by any particular vertical or merchant set that might have a slightly different trend than being offset by another vertical that might be picking up slack?

Okay, Tony. Thanks for the compliment. Firstly, on our spreads, they are remaining fairly consistent. There's not a lot of color I can provide to that. I'm happy to give you more detail on the average ticket. In adjusted U.S. terms, the Canadian average ticket is higher than the U.S. It is slightly over a $100 and ours is high $70s. That's a function of having larger merchant customers in Canada that drive a higher average transaction. We didn't see a lot of movement at all in the quarter with either average transaction. That's it

Thanks a lot.

Our next question comes from the line of Greg Gould from Goldman Sachs. Please go ahead.

Paul, I just wanted to drill down a little more on the ISO versus direct business. Can you quantify what percentage of new signings are coming from -- in the last quarter, came from the ISO channel? I think the 10% number you meant was total revenue, right?

Yeah. Greater than 10%, Greg. Yeah, it is. I said in previous quarters that the ISOs. In fact, in the most recent quarter, Q2, the ISO signings, actually in terms of number of contracts exceeded our direct signings, which isn't puzzling when you understand we have thousands and thousand of independent ISO agents working for our ISO customers sending in business. The total size of those contracts, though, are significantly smaller. I mean, a typical ISO contract is below a hundred thousand dollars in annualized bank card volume while the direct sales force is on the low end at $300,000 in annualized. In dealing with many contracts that are hundreds of millions of dollars. So in terms of total volume and revenue input, our direct sales force is still -- still has a greater impact on our volume in transaction activities, but we are adding ISOs daily. That whole channel is becoming more significant

And is the direct sales force, in general, meeting quota?

In fact, they are ahead of quota, I'm pleased to say. They have exceeded quota in all areas with the exception of equipment revenue, and they're going -- if you're going to miss one anywhere, that's a great place to miss it. There is not a big markup on that equipment. Overall on the bottom line, including a little bit of a short fall of equipment, our direct sales force is ahead of quotas. We are delighted with those activities

Great. One last question. What are your thoughts on debit acceptance in the small and mid-size merchant market? Is there increasing acceptance or interest in deploying the PIN terminal?

Greg, we continue to be very bullish on the mid-market. They have always lagged. They are not early acceptors of that type of technology or new payments. It is usually that charge is led by the big box merchants who get the fact immediately that it is a lot less expensive and have a more systemic application to employ all that equipment. Now, PIN pad prices have come down dramatically. There isn't a terminal out there that doesn't have a PIN port. It is no big deal to equip these guys. We still make progress into that channel every day, which I think is an important indicator. Not only are you making progress into the existing base, but new business that we're signing, the majority of those guys are not only accepting bank cards with us, but they're taking debit right out of the starting gate, which I think is a very good sign

Thank you.

Paul Garcia; Thanks, Greg.

Our next question comes from the line of Kartik Mehta with Midwest Research. Please go ahead

Good morning. A question for you, Paul. Do you see any benefits from the energy increase we're going to have in April and what you can do with your pricing?

Kartik, we do. We have -- we pass on interchange to our merchants, the big guys, kind of basis point for basis point. For smaller merchants, there is an opportunity to round up and, you know, while it may not be material for a merchant that does half a million dollars a year to have a rounded basis point or two, you apply that to our entire portfolio. Keep in mind these guys have combined MasterCard and Visa rates. There is an upside for us. We are practical. There has to be a balance between truly being a merchant advocate and not taking advantage of that and doing what's appropriate and not, in any way, harmful to the merchant. I think we struck that balance. I wouldn't look for anything hugely material. We get a little up-tick there.

There has been discussion about the Wal-Mart class action lawsuit against Visa and MasterCard. As you lock at this lawsuit, are there any positive or negatives for GPN based on whatever outcome you think might happen? What outcome would be a positive? What outcome would be a negative?

I think that's a long conversation. Let me see if I can boil it down. I think the positive is that it creates a lot of turmoil in the market. One of the things we bring to the party is that we are speedy. Where there's some type of turmoil, we look to take advantage of opportunities to reinforce our merchant advocacy position. I don't know where this thing is going to end up, but my guess is the merchants end up with a check card rate that is not as high as it is today, probably closer to the debit interchange levels, which will be good for our merchant community. Anytime you're dealing with any type of interchange activities, whether up or down, there is typically an opportunity for us, too, as we just discussed with either you or Greg. In terms of negative, you know, you could take this thing to the most outrageous conclusion and say that the payment, the entire payment networks are threatened and challenged through this litigation and anything that directly impacts Visa negatively, we feel, or MasterCard negatively, we feel. At the end of the day, we want their brands to be successful because we benefit from that. So if this truly does something that would have a significant negative impact on Visa and MasterCard and their viability as payment networks, that would be negative. I don't think anyone can imagine that scenario

Thanks, Paul. I appreciate it.

Pleasure.

Our next question comes from the line of Apurva Parikh of SunTrust Robinson Humphrey, please go ahead.

My question has been answered

Our next comes from the line of Don McArthur with Safehold [inaudible]. Please go ahead

Congratulations on a great quarter guys.

Thanks, Don.

Have you seen changes in transaction volumes with the imminent war with Iraq, any effect of that?

We really haven't, Don

Okay. [inaudible] When did you realize the one-time benefit of the $30m from the CIBC, the change in how that was done?

It was a year ago November, the second quarter of last year.

Okay. So this -- so your improvement of -- is actually growing over that one-time improvement as well?

We had an acquisition that hadn't yet annualized this year in the National Bank. In terms of capital spending, last year we had two facilities to get out of the ground, our Baltimore one which was increased in size to take on the Canadian business or part of the Canadian back office business. In the more recent time we have put up the Canadian corporate office based in Toronto that runs our Canadian organization. So those two are fairly expensive proposition that are behind us. The capital spending, which we had originally estimated this year at 15 to 25, we see now at about 15 to 20 as a tighter range for this year. So you're getting the benefit of both.

Right. And then -- do you see anymore of the projects for fiscal '04 for Capex?

We anticipate to spend at or around depreciation for normal Capex, and then special projects occur all the time. They're either market driven or opportunities relative to acquisitions, and I think we could update you better on that in July.

Great. Thanks. Nice quarter.

Thanks.

Our next question comes from the line of Gary Prestopino with Barrington Research. Please go ahead

Good morning. A couple questions. All your growth this quarter was organic with the anniversary of National Bank of Canada?

That's correct

Can you give us an update on what's going on in Sears. How much more cross sell potential do you have in Canada? Your best guess, does this feel very similar to the '90-’91 period with the Gulf War as far as what happened with credit card transaction usage and spending, or are things different now?

I'll take them in order. First, Sears. You know, you're Chicago based, there's a continued upheaval with the Sears management group. There have been some executive changes, not only the published ones that hit the national press not too long ago, but there's been recent changes in Sears, too. A number of our contacts have left and taken other positions. The Sears program continues, but it has slowed down significantly. We are getting and processing transactions for signed customers right now as we speak, but there hasn't been a lot of new activity. It doesn't mean there won't be. Right now there's nothing going on. Now, as we said earlier, Gary, the Sears deal, if it is a homerun, it could move the needle for us. If it limps along, because of the minimum payments and other things that we negotiated upfront, we are going to do just fine on this deal. It is not going to be a needle mover, but it will be just fine. So we're kind of into the it's just fine. It is not a needle mover phase. Now, in terms of cross sell in Canada, let me throw that to Jim.

Gary, if you recall, we closed on national bank, we outlined a range of around $5b or $6b of cross-selling opportunities. This meant that between the two portfolios there were customers in the MasterCard portfolio we could switch their Visa business from another processor and vice versa for CIBC. We're probably halfway or so through that cross sell of the existing base, but it does not mean we can't go out -- and we do it all the time -- and bring in new merchants with services that is we offer, the combined merchant statements on the rest

The last question, Paul

You know, Gary, I think -- back to the tragic events of September 11th, '01 as a probably more immediate comparison. And let me tell you what we saw there. Not days after September 11th, but a couple weeks after that, things got fairly back to normal in the U.S. The surprise was the impact in Canada. I suspect we may see similar things from this war activity. The Canadian economy, we didn't fully appreciate, and our merchants said, in particular, which is a broad set of Canadian merchants, relies on a lot of international travel, not only from the United States, but other destinations, but the U.S. in big measure. Consequently, when people are afraid to travel, in the U.S., it doesn't affect us as dramatically. It might hit our restaurant segment, our high-end. We don't have airlines and we don’t have big rental car contracts. We don’t have a lot of that in the US. We have a good, solid mid-market merchant base, which weathers these things. We didn't see a big impact after September 11th at all. In Canada, we could feel the impact, depending on the duration of the conflict, et cetera. So that's our prediction. Jim.

Gary, we've indicated before, Canada is about 25% or 26% for the company's revenue

To put it in perspective

Thank you.

Our next question calms from the line of Zach Mulasses(ph) from JS Capital management. Please go ahead

Can you discuss the nature of the merchant receivables appearing on your balance sheet and how you expect the growth in the business to affect that account going forward? Do you expect growth consistent with the business, or does it just -- is it just a one quarter and then it gets corrected kind of a deal?

You are referencing the swing in merchant processing?

Yes

From 67 to 30? There's two factors to think about. On a year-over-year basis, last year we had a different business model than this year. Last year -- there is a practice in Canada where merchants, if you came into one of our Canadian merchant stores today and bought a product or there was a service provided, we would fund you this evening, but backdate it so it would look like you got immediate funds the day the service was provided. That business practice has been in Canada. It is an outgrowth of the idea if you go into a branch, make a deposit, and get same-day access to your funds. They carry that over to the merchant [inaudible] business. It is not the model we have in the United States, but it is currently in practice. On the first year, the CIBC side, the Visa side of our portfolio, the bank provided the funding and incurred the interest expense associated with that additional funding, the backdating. This last year, the end of our fourth quarter of last year, we took on that obligation. Global took on the obligation so the bank is no longer funding it. That's the primary reason you see a big swing. We are lending more money to our merchants. Money comes in the following day or within two or three days, depending on whether it's domestic or international transaction from the associations, but on the Visa side, we'll continue to see fairly large swings on that changes in working capital line for as long as we have that business practice in place. On the MasterCard side, the agreement with national bank is they will fund that obligation and we will pay the related interest expense.

Okay. But on an annual basis, you'll see a swing, but does that mean you'll see growth along with the business?

I guess in the long term, yes, but it's hard to predict, and the reason we discuss cash flow X that number is to predict it would be too difficult.

Okay. Thanks.

We do have a follow-up from Tony Wible from Salomon Smith Barney. Please go ahead.

One of my questions has already been answered. I know you have had a lot of questions on the [inaudible], but I was wondering, can we spend a little more time, can you just go over again the progress you're seeing and maybe quantifying the number of ISO relationships you have added over a year ago versus today and also what you view as your competitive advantage. Are these relationships exclusive, or are you signing up with some new ISO’s you are getting together or you are working with ISO’s that don't have exclusive relationship? Can you go into that dynamic? Thanks.

Thanks, Tony. We have, probably, 60 ISO’s doing business with us. Of that group, there are a number of small ones, but there is 20 of those guys that contribute a disproportionate share. We have some of the biggest ISOs in the country doing business with us. That position, Tony, the last year probably doubled. It was probably closer to 6% of revenue. It is now more like 12% of revenue. That's been a material increase. In terms of exclusivity, some ISOs are exclusive. Some have majority commitments of exclusivity, but if we don't have a product or a service, then there's some carve outs. We strive to have every product and service you could probably want as an ISO customer and are constantly investing money to give these guys more. I would say the majority of the ISO’s either are primarily exclusives or have exclusive agreements with us. The reason they are willing to do that is they drive much more favorable pricing. If they say, listen, I want to buy stuff from you -- guys by the drink, we would be delighted to sell it that way. If they make a real commitment to us, we'll make a real commitment to them.

What would you say is your biggest competitive advantage? Have you seen any consolidation between the ISOs?

)) You have bigger ISO’s buying smaller ISO’s. You have bigger ISO’s with something called sub-ISO’s. The big ISO will drive a deal with us and then sign smaller ISO’s who don't have the sophistication to demand the service and pricing from us. The big ISO will get a little piece of the sub ISO. There is some of that going on. There is absolute acquisition of ISO. The old PMT guys, Rich Roberts and Greg Daly(ph) are out there trying to roll up some ISOs. There is activity there as well. We have competitive pressures. We have all the usual suspects out there trying to sign up ISOs. I think we're able to hold our own. Number one, we don't compete with these guys. We don't have an ISO sales force, per se out there, competing with our ISO’s. That is comforting to some of these ISOs. Number two, we treat it like an absolute separate business line with separate products, separate executive management. We make significant commitments. I think, Tony, once again, this payments conference we had was not inexpensive. It was CEO attended. We put a lot of time and energy into it. Everyone on this phone call presented and spent days with our customers. They see that as Global gets it, they're behind us and they're willing to make the commitment of time, energy, and capital to help me grow my business. So far it's working. You know, Tony, as I said in the last call when asked this question, it is a day in, day out with these guys. It is an investment every day

Would you say that those top 20 ISO’s that you're saying were disproportionately large, are they included as the ones that have been actively acquiring smaller ISOs?

Absolutely.

Tony Wible; Thanks a lot

You're welcome.

Our next question comes from the line of Greg Smith from Merrill Lynch. Please go ahead.

Hi, guys. This is David Parker for Greg Smith. We just had a few questions for you. A follow-up on an earlier one. You've been successful over the past year in expanding your margins. We were wondering what the opportunity is as you continue to integrate these acquisitions in '04 for margin expansion and where you continue to get the leverage?

I think, David, we are pretty well through with integration activities from our acquisitions. There are significant opportunities ongoing from other expense reduction initiatives? So we are expecting and have set internal targets to continue margin expansion to reach a reasonable conclusion. Jim, do you want to add anything?

To move businesses to a common platform and our size and scale gives us an opportunity to continue to look at renegotiating and lowering third-party vendor providers. So I wouldn't suggest just because we completed on time or, actually, I think ahead of time the national bank and CIBC front-end conversions. That was not only for savings, but also for customer convenience. There's still plenty of opportunities within the organization.

Okay. Great. And then on the revenue guidance that you gave, there's an implied wide range for your fourth quarter of $113m to $132m. Any specific reason why it is that wide of a range?

I think we are comfortable with the range and have left it as such

Fair enough. Two housekeeping ones. Your thoughts on expensing options. It looks like it's going to come down the pipe soon. Can you talk about the CIBC stock, when does the lockup come off, and are you anticipating any movements by CIBC?

David, in terms of expensing options, we are, obviously, watching that very closely. I think that our industry doesn't -- isn't quite as challenged as some high tech industries, to put it mildly. We will -- we're watching that very carefully. We will comply, when appropriate, potentially even before you're forced to. We're looking at this whole idea. Secondly, on CIBC, their lockup continues but has changed. They had a two-year absolute of the third year of our agreement. They can sell starting in March, but under the rules of 144, which limits their. They haven't sold any stock to date. They absolutely have a long-term focus on their investment and it's not to say they wouldn't saying something in the future. There are no plans at present that I am aware of.

Great. Thanks you.

Our next question comes from Dan Perlin from Legg Mason. Please go ahead

Thanks. What percentage of the business is direct versus indirect. I don't know if you gave a percentage on the call?

It will -- approximately 18% is indirect. We said less than 20.

Still hovering around the 18% range?

Maybe a little less.

How with 18% of the business still declining double digits, you think that piece would go away pretty quick as a percentage of the mix. It seems as though a lot of the margin expansion should continue to come from that mix shift. I questions my question is how long until it is 5% of your business?

We think once we get it down a little more, we think it starts to level out a little bit, quite frankly. You have some old stable portfolios that -- you know, we do add business from time to time in that business, too. We have some loyal customers who add business. We announced, this is a fourth quarter event. We announced Union bank as a new customer in the indirect business. We are adding new customers. We don't see it near term being 5%, unless, of course, that's steady. We do want to grow the direct around it. If we do something significant on the direct, that has an impact

In this quarter, the Canadian transactions you mentioned were up high teens. In the past couple quarters, I think you mentioned -- I'm sorry. You said high single digits?

That's correct

In the last couple quarters you mentioned low teens. Is there anything transpiring there other than seasonality for the market?

I don't know if we saw a slowdown. The numbers reported accurate. It could be a quarterly event. I mean, the difference between low teens and high single digits is precise with a portfolio of that size. We'll continue to keep you guys informed. I'm not prepared to say there is a significant trend afoot here.

With the Visa check product you're going to sell and check being a little less than 10% of your business.

Yep

Are you going to sell that into your verification and guarantee guys so the hope there is you replace that product?

Well, it clearly is a replacement right away for the verification product.

Right. Does that have higher margins on it?

It has pretty darn good margins. Because of the valuable data base you can access, you can make a much more informed decision either on a guarantee or verification.

I would think so. You have a positive file on this so you know what the good funds are, right?

Right. So the biggest part of a guarantee price is your loss element. So if that's reduced dramatically, theoretically, you could offer your merchants a much better product at a lower price

Is this exclusive with Visa or is Visa offering it to other merchant acquires?

They are offering it to other merchant acquires. I would be surprised if they offered it to our key competitors who they have ongoing less than favorable relationships with. We think we are in a great spot here.

That's it. Thank you very much. Appreciate it.

My pleasure. Thank you.

We have no further questions in queue. Please continue.

Well, thank you very much, everybody, for joining us today on our call. We thank you for your continued interest and investment in Global Payments.

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